Disappointing IPO trading in Europe, possibly driven by investors who are new to equity capital markets (ECM) taking profits earlier than their more established peers, is strengthening buyside resolve on price discipline for any upcoming deals, practitioners said.

The trend holds a key lesson for sponsors and other sellers hoping to do deals next year, or even squeeze a transaction through before year-end.

Cox, a Spain-based energy and water concessions group formerly known as Coxabengoa, is hopeful of pricing an IPO in November.

Across the rest of EMEA, listings for South African discount retailer Boxer and Emirati consumer retailer Lulu are among the notable IPOs that are still possible before the end of 2024.

However, the performance of a recent crop of European deals has left a bad taste in the mouth. A 10% plus fall in the share price of Polish retailer Zabka Group [WSE:ZAB], despite an early spike in trading, has hurt buyside sentiment; Zabka priced a USD 1.6bn equivalent IPO on October 10.

Zabka was followed underwater by Applied Nutrition [LON:APN], which briefly traded above its 140p a share share price before closing at 135.4p a share on Friday, its second day of trading.

The falling share prices of Zabka and Applied Nutrition have given investors justification for maintaining a demand, started in 2022, for far larger discounts to listed peers than has been the historic norm, to provide a bigger buffer on risky IPO investments.

An ECM banker, who was involved in Zapka’s IPO, owned by CVC [AMS:CVC], said that, on reflection, the offer price of PLN 21.50 a share, the top of the range was probably too high.

The banker said the trading likely reflected the wisdom of perhaps pricing further down the range even when deals were covered enough to price at the top.

Media representatives for CVC did not respond to requests for comment on this piece.

Two investors, and the banker, noted that although IPO books look strong, there may be a false sense of security across the market in general, prompted by an influx of new investors into the IPO market, as covered by ECM Pulse before.

Several sources have spoken about a growing universe of between 70-90 dedicated ECM desks within EMEA. This is a huge number given complaints of a scarcity of investors only a few years ago.

However, their commitment to longer term investing is being questioned by many, with the term “fast money” being used by multiple sources to describe new capital markets desks.

This could explain Zabka and Allied Nutrition which both had healthy aftermarket spikes on their first days of trading, before falling below IPO price.

“Liquidity is still really bad in early trading and all it takes is ten investors in a book of over a hundred to start selling for a stock to fall dramatically,” said one investor.

The banker added that many of these new accounts have often taken part in “huge pre-marketing roadshows” and have seem very committed, giving some more comfort in allocating them stock.

But a small number appear to be then taking immediate profits. “Some of the new money seems to be playing the first-day optionality and the rest are not following through and buying more,” said the banker. “The hope would be then that the long-only investors would buy more to support the stock, but this isn’t happening and in fact some fundamental accounts have been asking for larger scale-backs in allocations.”

The lesson seems to be to price deals at levels where traditional long-only investors want to buy, even if coverage levels indicate an ability to price higher up a price range. There is no guarantee of how sticky higher-level coverage may be.

The phenomenon of IPOs trading below water is not unique to Europe or EMEA. India’s largest IPO of the year Hyundai Motor India [NSE:HYUNDAI] is also now below its IPO price.

Future-proofing investments

Recent IPO trading adds woe onto woe for many dedicated ECM buyers given that the largest listing of the year, Spanish luxury conglomerate Puig [WSE:PUIG] is now more than 20% below the offer price on its EUR 2.7bn new listing in April.

EMEA IPOs have produced a return of just over 11% YTD, slightly outperforming the YTD return of the Stoxx 600. But it is a sharp drop from the over 20% of alpha generated from new listings in EMEA as of the end of August.

The biggest change in the return profile has been the performance of Puig, given it had traded just above offer price right up to the release of its earnings results on 5 September.

Source: Dealogic

The first investor noted that companies using forward-looking numbers when pricing an IPO is the norm, but when companies like Puig miss earnings, it inevitably can lead to a retreat from the stock because it has become so much more expensive compared to peers than was though at pricing. Puig was already an expensive IPO on those estimated numbers.

Because of Puig’s size and the widespread participation in the listing, some of Europe’s biggest and most important capital markets investors are now probably nursing significant losses.

According to Dealogic Institutional Analytics data Franklin Resources, T Rowe Price, BlackRock, TIAA and Fidelity Management & Research were among the largest institutional investors in Puig as of 30 June, the first reported date after the IPO.

While fundamental investors say they are still engaged with good, high-quality, IPO candidates, the price must be right for them to participate.

“These big discounts are not going away,” said the second investor who sits at a large asset manager. “We are never going back to the sorts of deals in 2021.”

To attract fundamental investors next year sponsors and sellers need to be generous on price, even if there are orders from less traditional accounts at higher levels. In IPOs, investor quality still matters over quantity.